Money Market- Mildly Bearish Position Takes Hold

In the wake of 2016, the Federal government in attempt to reflate the economy due to liquidity concerns coupled with hard pegs hinged deeply on the domestic money market by focusing primarily on short term instruments to fund the budget. The cost of financing the budget was high on the back of rising inflation and a hawkish monetary policy. Thus, the fiscal authorities found themselves absorbing huge debts at relatively high cost, making debt servicing a smoking elephant. Expected, the expected short rates have shifted from “rising to falling” on the back of dwindling inflation.

Fig 1: T-bill rate

Source: CBN

Liquidity premium have tilted from constant to rising, as forward rate take a lift - which is reflective in the OMO bills.

An humped yield curve gradually give way as a more inverse one take hold. Therefore the dynamic between a positive real rate and lower inflation premium, allows a lower discounted cash flow to be applied on federal government long term instrument. However, with the normalization of interest rate abroad, expected rise on long rate on foreign interest have begun to rise as the effective annual rates have risen too. Underlying the new reality that the cost of external borrowing will rise while the cost of domestic debt dampen as inflation fall.

Therefore a mildly bearish position has taken hold, even though we foresee an increase in the supply of long and medium term securities by the fiscal authorities to fund the N 9.12 trillion budget.

We also expect monetary authorities to revert back to dynamic sterilization in attempt to alter supply as the election season takes steam with the intent of influencing rates both at the interbank and exchange rate corridor.

Table 1: Treasury bill

Date

Tenor (days)

Yield (%)

5/2/2018

91

10.2557

5/16/2018

364

11.9782

5/16/2018

182

11.0801

5/16/2018

91

10.2557

5/30/2018

364

12.3554

5/30/2018

182

10.8576

5/30/2018

91

10.2557

6/13/2018

364

12.9897

6/13/2018

182

11.0801

6/14/2018

91

10.4662

Source: CBN

Therefore, the rates are largely steep as inflation premium begin to trigger falling expected rate, while pinpointing to a more constant liquidity premium, compared to the past where liquidity premium increased.

Fig 2: Correlation between tenor and yield (Treasury bills)

Source: Proshare research

Table2 : Open Market Operation (OMO)

Date

Tenor days

Yield (%)

4/27/2018

97.0

11.3

5/3/2018

245.0

13.2

5/3/2018

105.0

11.4

5/10/2018

231.0

13.2

5/24/2018

231.0

13.2

5/24/2018

112.0

11.4

5/25/2018

230.0

13.2

5/31/2018

112.0

11.4

5/31/2018

231.0

13.2

6/7/2018

112.0

11.4

6/19/2018

219.0

13.1

6/19/2018

93.0

11.4

6/25/2018

87.0

11.3

6/25/2018

213.0

13.1

Source: CBN

Fig 3: Correlation between tenor and yield (OMO)

Source: Proshare research

On the other hand, OMO bills have risen steeply, as liquidity largely increases with maturity

We expect supply of more OMO bills by the apex bank, as the election draws nearer in order to clamp down excess supply of the nominal currency.